Monthly Archives: December 2012

In the first action of its kind since the agency’s creation, the CFPB, Attorneys General from New Mexico, North Carolina, North Dakota, and Wisconsin, and the Hawaii Office of Consumer Protection joined forces to enjoin a debt relief service provider from conducting business in violation of federal laws and the laws of the five participating states. These agencies brought suit in U.S. District Court against a Miami-based firm, and, as part of a global settlement, the court entered an order on December 21 permanently enjoining further violations of the FTC’s Telemarketing Sales Rule, Title X of the Dodd-Frank Act, and applicable consumer protection laws of the five states.

The defendants, Payday Loan Debt Solution, Inc. (PLDS), and its principal, Sanjeet Parvani, were found by the court to have advertised widely over the internet, received telephone calls in response to those internet marketing efforts, and collected substantial monies from consumers purportedly to help them settle their payday-loan debts. A joint investigation by the Bureau and the States found evidence that PLDS routinely charged consumers a fee in advance of actually settling their debts.

The court ordered PLDS to make restitution in the amount of $100,000 to consumers who were charged advance fees but received no services. The court also ordered PLDS to pay a civil money penalty to the Bureau, makes PLDS subject to CFPB supervisory authority for a period of two years, and imposes compliance reporting requirements during that period. Because PLDS cooperated with the investigation and voluntarily agreed to resolution of the matter, the civil money penalty was a modest $5,000.

The significance of this matter lies not in its particular facts and circumstances but in two other aspects. First, this proceeding appears to be a harbinger of further CFPB actions against participants in the debt-relief industry. In its press release, the CFPB describes the Florida action as part of its “comprehensive effort to prevent consumer harm in the debt-relief industry,” and warned that it “is focusing not only on debt-relief service providers, but also on their partners.”

Second, the CFPB’s publicizing of the settlement as the fruit of the long-anticipated (but heretofore unrealized) cooperation between the Bureau and State Attorneys General, presages further coordinated action. The Bureau’s press release quotes Director Cordray as saying, “We are pleased to be working with our state partners on this important effort to protect consumers.” In recent months, the CFPB has also taken aim at the mortgage modification industry, filing two actions in federal district court in California to shut down alleged mortgage modification scams.

The report sheds a light on industry practices that ultimately shape consumers’ financial report cards. Consumers Union, the policy arm of Consumer Reports, welcomed the report and noted the importance of credit reports to the financial health of consumers.

“For years we have been saying that we need to take the mystery out of credit reporting,” said Pamela Banks, senior policy counsel for Consumers Union. “Your credit report is critical to your financial future because lenders use it to make big decisions about you, like whether to approve you for a loan. The report helps consumers understand what goes in to their report so they can be smart about how they handle their credit.”

The report notes the dominance of credit card history found in the typical credit report, with most information in credit reports coming from a few large companies and financial institutions. And while the report also found that more than a third of disputes about credit report accuracy have to do with collections, only one in five consumers obtain copies of their credit report each year – the easiest way to identify errors and have them corrected.

Banks said, “It is especially concerning that so few consumers are getting their free credit reports every year. Often times the only way that a consumer will find out that there is an error is after they’re denied credit, which could easily be avoided by routinely checking your report and disputing errors.”

Consumers Union has a page at www.consumersunion.org/creditreport with information on how to get your free credit report, how to fix mistakes in the report, and why it’s so important to check yours every year.

However, as important as a credit report is, Consumers Union points out that there is one thing missing from that report – your credit score. And while consumers can currently pay to get their score, a previous report by the CFPB found that one in five consumers would be likely to receive a meaningfully different score from the one sent to a lender.

“Many consumers might assume that the report includes your score, but it doesn’t,” Banks said. “Even worse, the score you pay for may not be the same score that businesses are using to make decisions about you and your finances. Consumers need access to a reliable score and they shouldn’t have to shop around for the best deal and hope that it’s an accurate score.”

Here comes the credit-card crunch again. Consumers, and increasingly subprime borrowers, are taking on more debt and could find themselves slipping back into the black — or rather the red — hole of financial distress.

“Banks want to lend,” says Steve Chaouki, group vice president for the financial services business unit of TransUnion, the credit-rating bureau. “And there isn’t much demand for credit from prime consumers.”

Credit-card solicitations have fallen from their sharp increases a year ago and mailings to high credit scorers are dropping far faster than they are to those with below-prime scores, according to Ipsos, an international research firm.

Revolving credit, the bulk of which is credit cards, peaked in 2008 at $1.01 trillion, according to the Federal Reserve. That debt had recorded steady drops up until the beginning of this year when it started a slow upward crawl. In October, credit-card debt rose $3.38 billion, after a $2.19 billion decrease in September, to stand at $857.6 billion. That’s $6.2 billion more than the fourth quarter of last year, though still considered low.

TransUnion expects credit-card debt to keep swelling in 2013, reaching 2009 levels. It also predicts delinquencies of 90 days or more, which hit their lowest levels since 1994 and held flat throughout much of this year, to begin rising again.

“Some of this can be attributed to credit-card delinquencies so low that at some point they were bound to increase,” Chaouki says. “A more significant factor may be that credit-card originations have been increasing in the last few years, and with that increase we have seen nonprime borrowers receive not only more credit cards but also comprise a larger share of new credit cards.”

Cards going to nonprime borrowers, or those with VantageScores lower than 700 on a 501-to-990 scale, account for nearly 30% of new credit, according to TransUnion’s data.

Credit-card debt per borrower also is on track to rise, according to TransUnion’s data. The bureau expects balances to stand at $5,050 per borrower by the end of the year, up from $4,996 at the end of the third quarter, and then jump to $5,446 — a near 8% hike — by the end of next year.

United Parcel Service Inc. and rival Fed Ex Corp. have already made themselves as indispensable to Christmas as Santa Claus. This season, though, they’re taking a much more active role in holiday shopping. WSJ’s Betsy Morris reports. Photo: Bloomberg.

Matters could get worse yet, considering consumers are admitting that it will take them extra time to pay off holiday debt.

Nearly 25% of respondents in a recent myFICO survey said they will need more than three months to pay off this year’s holiday charges. That’s a notable leap over the 18% who said so in a similar survey the consumer division of FICO, the credit-scoring company, conducted in 2010.

And then there are the recent spikes in nonrevolving debt, which includes auto loans and college-tuition balances that are reaching unprecedented levels. Nonrevolving debt vaulted $10.8 billion in October to $1.896 trillion.

In all, consumers took on 6.2% more debt in October to hold $2.754 trillion, only 8% more in outstanding loans than they held in 2008.

“The increase in student loans and credit-card debt is a disturbing trend that may have disastrous consequences for consumers,” says Nick Jacobs, an administrator for CARE, the Credit Abuse Resistance Education Program. “Unless consumers fully understand the obligations attached to these debts, they may soon find themselves in more trouble than they can handle.”

Why would consumers, only three years after piles of credit-card debt and mortgage debt sent many spiraling out of financial control, allow this to happen again?

They might not have ever really changed their ways, according to Odysseas Papadimitriou.

“There are a lot of people with the wrong impression that credit-card debt was going down,” says the chief executive of Evolution Finance, which operates Cardhub.com, a credit-card research site. “It was going down because people were defaulting and their debts were being taken off the books. That didn’t mean they didn’t owe banks the money anymore, just that the banks had written them off.”

Banks charged off some $208.8 billion in bad loans from 2009 to 2011, with charge-offs declining each year. They’re on track to take upwards of $33 billion off the books this year.

“Fewer people are falling so far behind on their credit-card payments that banks have to write their debt off the books,” Papadimitriou says. “That’s great. Still, you can’t overlook the fact that banks charged off $7.78 billion in old credit-card debt during the third quarter alone.

An expert foresees many positive developments for consumers on the personal finance front.

What does 2013 have in store for our wallets? Well, assuming that the doomsday preppers are wrong and Dec. 31 comes and goes without incident, we can certainly make a few educated guesses about some of the new year’s most-pressing personal finance issues.

It’s always smart to get a head start on responsible money management, after all, so let me grab my crystal ball look into the future.

The fiscal cliff will be anticlimactic.

The issue foremost in the minds of consumers and financial professionals, not to mention political junkies, is what will happen with the fiscal cliff. Will we hit rock-bottom or somehow avoid the fall and keep rolling like the bus in “Speed”? The latter option is more likely for the simple reason that no one wants to see the country’s economy pushed into a deep, prolonged recession, no matter what their political leanings may be.

That’s not to say Washington will strike a deal by the Dec. 31 deadline or that a lasting resolution will come anytime soon, but you can bet they’ll work out something, even if it applies retroactively or simply postpones a real decision. That’s why the fiscal cliff mess won’t affect your wallet much in 2013, aside from some initial uncertainty on the stock market.

Credit card sign-up offers will remain strong.

The post-recession credit card market has been marked by extremely attractive sign-up deals targeted at the roughly 50% of people who have excellent credit. You can currently get a rewards bonus worth up to $500, 0% on new purchases for up to 18 months, or a free balance-transfer credit card that has the potential to save you up to $1,000 in interest and fees. Don’t despair if this is the first you’ve heard of such deals — you’ll have plenty of time to take advantage of one in 2013.

While low-interest introductory periods probably won’t get any longer, they shouldn’t regress much, and rewards bounties will continue to be worth hundreds of dollars.

Mobile wallets won’t catch on.

We heard a lot about mobile wallets in 2012, with a number of different groups announcing product launches and rumors swirling about when Apple and Android will roll out compatible smartphones. You can expect the talk to continue in 2013, but not much else.

The market is simply too fragmented, there are still too many security concerns, and the requisite infrastructure is not yet in place for merchants to accept smartphone-based payments. Besides, it’s frustrating enough now to have your cell battery run out. Are we really ready to also be left walletless?

Secured credit cards and prepaid cards will experience a boom.

The Credit CARD Act and the Durbin Amendment serve as the impetus for the rise of secured credit cards and prepaid cards, respectively. The former made unsecured credit cards for people with bad credit unprofitable by capping the first-year fees that issuers can assess in order to curtail the practice of charging folks up to $200 for as little as $50 in available credit. The latter capped debit card swipe fees, thereby costing banks $8.4 billion in annual revenue and forcing them to explore unregulated alternatives, such as prepaid cards.

Both card segments experienced increased popularity in 2012, but we can expect that trend to be exacerbated in 2013 as people become more familiar with them and more issuers enter each space.

Check-cashing stores will be in dire straits.

Check-cashing stores have long followed a niche business model, able to turn a profit despite consumer contempt for their borderline-predatory fees because they were the only check-cashing option available to unbanked consumers. The introduction of big-bank prepaid cards that allow people to directly load checks by taking pictures with their cellphone or visiting an ATM has changed that dynamic.

Such cards are far cheaper than check-cashing stores, so you can expect the traditional check-cashing industry to suffer and many stores to go out of business as prepaid cards become less of an unknown quantity to consumers.

Personal finance will become more consumer-friendly.

In a way, it’s remarkable how much more transparent the credit card industry is today compared with just a few years ago. Thanks to the CARD Act and the Consumer Financial Protection Bureau, bait-and-switch pricing, unfair payment allocation, double-cycle billing, predatory fees and unscrupulous customer service practices are all much less of a concern these days.

We’ll be singing somewhat of the same tune for different segments of the personal finance industry this time next year, as the CFPB is currently supervising credit bureaus and debt collectors and will likely set its sights next on prepaid cards and checking accounts. We can therefore look forward to more accurate credit reports, a debt collection market that’s less reminiscent of the Wild West, better prepaid card disclosures, and more consumer-friendly methods of resolving disputes with banks, just to name a few changes.

Credit availability will rise.

Finally, with the economic recovery expected to continue and unemployment set to fall, it will be even easier to get credit in 2013 than it was in 2012. That’s actually a bittersweet development because we’re currently on pace to incur $43.5 billion in credit card debt for 2012, and additional credit could be a harbinger of a more-pronounced buildup next year.

That’s why we must place an emphasis on budgeting and spending only what we can afford to pay back in 2013. If we don’t, the financial outlook for 2014 could be decidedly more ominous.

What do you think? Whether you agree or disagree with our outlook for next year, tell us why in the comments below so we can ring in the new year with a little healthy debate.

The IAPDA provides the leading professional training and certification program to the Debt Relief industry. IAPDA has graduated and certified over 3400 members since 2000. IAPDA Certified Debt Specialists and Certified Credit Counseling Specialists counsel debt burdened consumers on all debt relief options, debt settlement, credit counseling, debt consolidation loans and bankruptcy.

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